Jason Zweig has a great article (as usual) on Charlie Munger in his weekly Saturday column. Charlie Munger bought some securities for the Daily Journal, a newspaper where he serves as the director, and made a boatload of money. The original story is on Bloomberg (check it out) with a focus on the SEC’s questioning why the paper should not be considered an investment firm. However, the question remains what did Munger buy?

Charlie Munger

I was honored to help Jason Zweig with research on this topic, and only a small quote appears in the WSJ (not unexpected especially as editors cannot post 10 minutes of my rambling), but here is some more research I did on the topic. I would like to thank some anonymous people who helped me with my questions.

First a quote from Bloomberg article:

Charles Munger’s Daily Journal Corp. (DJCO) told regulators that selling Treasuries and jumping into stocks was the safe move for the publisher in the financial crisis.

“The board recognized that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero,” an attorney for Los Angeles-based Daily Journal wrote in a March 18 letter made public today.

Also from a reported transcript at a DJCO investor meeting (note I cannot confirm this transcript is correct, but believe it to be, full one embedded below).

Shareholder: Two questions, if you don’t mind. From 2000 to 2008, Daily Journal seemed to reinvest nearly all of its profits into US Treasury notes and bills. In the last two years, after February 2009, Daily Journal has invested over $30 million into common stock of three companies. Can you discuss the difference between the investment landscape over the last few years versus 2000 to 2008?

Munger: Well, when we’re engaged in something difficult, as we were with our declining main business, we tended to want extra reserves of strength. As we got so much extra money and the opportunities in marketable securities got more extreme, we changed our point of view as the facts change.

Keynes used to say, “When the facts change, do you change your opinion?” (Keynes actual quote was: “When the facts change, I change my mind. What do you do, sir?”) Well, of course you do. That’s what we did. Our circumstances were different and our opportunities were different, so we behaved differently. What would you do?

Shareholder: Is it any reflection of the investment climate, or purely…

Munger: Yes, of course, that was part of it. The price you pay for some of those securities was ridiculously low. In fact some of that stuff was something that happens once in 40 years or something. Who in the hell keeps money sitting around waiting for one of those opportunities? (A) It might come and go and you may not recognize it, and (B) what do you do during the 40 years you’re waiting?

So I don’t think you should be terribly encouraged by what has happened. It doesn’t indicate that suddenly a recurring stream of money going from people in their 90s. It just means that for one reason or another, we behaved pretty sensibly, and reacted pretty intelligently to opportunities. Other people didn’t do it.

Now from Jason Zweig’s article:

Mr. Munger and Daily Journal haven’t disclosed which stocks he bought during the crisis, but Jacob Wolinsky of ValueWalk, an investing website, believes the largest position was in Wells Fargo, followed by U.S. Bancorp.

With that said now let’s look at what he bought, I am just copying and pasting the best of the informal notes on Charlie Munger’s purchases.

I have used a “trial and error” approach to trying to determine what is in the portfolio. This means looking at the timing of the purchases, guessing what could have been purchased and then back testing over many quarters to see if that possibility exists. The Daily Journal has always been more of a hobby than anything else for Munger, so I wouldn’t have expected him to do a great deal of original research just for Daily Journal. As it seems to me to have turned out, most everything he has purchased is also in Berkshire’s portfolio.
So, first off when were the purchases made? (I’m going to use calendar quarters b/c its easier on me, so Q1 = Jan-Mar)
Q1 2009 = $15.5 million of common stock in two Fortune 200 Companies
Q2 2009 = $4.9 million in corporate bonds of from a third Fortune 200 Company
Q1 2011 = $10.4 million of common stock in two foreign manufacturers
Q2 2011 = $790k of common stock in one of the two foreign manufacturers
Q4 2011 = $13.6 million of common stock in a fourth Fortune 200 Company
Q3 2012 = $4.6 million of common stock in one of the two foreign manufacturers
That gives us a total cost of the portfolio of $49.7 million.
Based upon the timing, subsequent price action, and investment income I can fairly confidently tell you that the purchases were as follows:
Q1 2009 = Wells Fargo (mostly) as well as some US Bank
Q2 2009 = Altria 30 year Corporate Bonds due 2039 initially yielding more than 10%
Q1 2011 = The two foreign manufacturers were BYD and Posco
Q2 2011 = The additional purchase was of BYD
Q4 2011 = This absolutely has to be Bank of America
Q3 2012 = The additional purchase was of BYD
That means at the conclusion of the last quarter, when the investment portfolio was valued at $129 million it was extremely likely to be composed of (totals round to $128 million):
~$66 million Wells Fargo (52%)
~$30 million Bank of America (23%)
~$16 million BYD (13%)
~$7 million Altria Bonds (5%)
~$5 million US Bank (4%)
~$4 million Posco (3%)
A shareholder I know personally who attended the event had the following to say about the notes from above.
Li Lu was at the DJCO annual meeting and even took questions. Charlie all but said that DJCO is an investor in BYD.
As for the rest of the portfolio, best guess is that it’s 75% WFC and 25% USB.
So we appear to have the answer.
Now if anyone has an answer for this please feel free to share (someone asked me this question and I did not have a good answer). How/why did Munger go from 100 percent cash to not only 100 percent equities but financials? If you recall in early 2009 there was talk of nationalizing the major banks, Roubini said that it was just 6 months until that would happen. How did Munger feel confident enough to put close to 100 percent of the newspaper’s assets in bank stocks?
Full transcript embedded below

Daily Journal Meeting Detailed Notes From Charlie Munger (1) by ValueWalk.com